What is a merchant cash advance?

By Caitlin in Advice
What is a merchant cash advance?

Merchant cash advances are funding options available for small-business owners who need money fast. They are typically structured so that a lump sum payment called split withholding is made in exchange for a percentage of future debit/credit card purchases. For example, a $20,000 lump sum payment was given to a business in exchange for $25,000 of future credit sales. The interest rate is typically between 5-10% of the initial payment. Also known as credit card receivables or credit card factoring, this process is quick and most often is completed within 3 business days.

Merchant cash advances are designed to help provide funds in exchange for a commission such as the percentage of a daily credit card income from a business. This payment method works best with businesses that earn over $1,000 a day in credit card sales (as this allows them to pay back their loan in a more timely fashion). The payments typically comes directly from the processor themselves and clears and settles the payment in a specific period of time.

Some advantages of a merchant cash advance versus a conventional bank loan are that the payment owed depends on the sale volumes in the business. This gives the business added flexibility to manage their cash flow, especially during a slow period of business. Also, merchant cash advances are processed much faster than a loan, which gives those borrowing money access to their money faster.

Merchant cash advances are not loans and these companies are not bound by state laws preventing excessive interest rates. This allows these companies to charge much higher interest rates then a bank. However, it is expected that with the convenience of quick money comes some short of disadvantage.

Important Things to Consider

Always insist on seeing all of the fees upfront before signing a contract with a merchant cash advance company. Make sure that you under the terms. Is there a daily fixed amount due or is it a percentage of your sales? Make sure you get a projected annual percentage rate for the loan. This will make it easier to compare your options before committing to one specific merchant cash advance company.

Despite the high cost of repaying merchant cash advances back, some businesses have no choice. For those who need money immediately, merchant cash advances are more convenient than that of a conventional bank loan which can take a long time to be approved and to see the cash from the loan.

Ultimately, merchant cash advances are convenient, flexible and most important, quick. With no fixed payments and no need for lengthy application with references or collateral liens, this type of funding option ensures businesses have the money they need without too much of a risk involved. What more could they ask for?


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